Loyalty Policies in Telecommunications Services Report
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Loyalty policies in telecommunications services Report April 2020 EXCUTIVE SUMMARY The telecommunications sector plays a key role in the economy, covering virtually all Portuguese families. However, according to data from the Eurostat and the European Commission (EC), Portugal displays prices for telecoms services that are significantly higher than the EU average and this difference has been increasing. Telecoms services are also those that prompt more complaints to the consumer rights association – DECO ((34.956 in 2018), and one of the sectors that Portuguese consumers perceive as the least competitive (cf. Eurobarometer, April 2019). The sector is characterised by the prevalence of services that include minimum contract periods (i.e., loyalty periods) and fees for consumers who terminate their contracts by their own initiative during the loyalty period. According to telecoms operators (i.e., service providers), this allows consumers to subscribe high quality services at lower prices and benefit from discounts in the price of terminal equipment, in the activation, installation and supply of services. These contractual conditions limit and discourage consumer switching. This occurs as a result of an increase in the switching costs during the loyalty period, that restricts mobility and makes consumers more vulnerable to the exercise of market power. A significant share of consumers chooses not to switch supplier and, from those that do change supplier, the majority does so after the end of the loyalty period. According to a EC inquiry from 2018, amongst the inquired consumers, about 53% never switched telecoms supplier. Similarly, according to a 2017 inquiry by ANACOM (the telecoms regulator in Portugal), about 51% of the inquired consumers did not change supplier and 68% of those that switched supplier only did so at the end of the loyalty period. This disincentive to consumer mobility gains added relevance the larger the number of contracts that establish a loyalty period and the longer the duration of the loyalty period. According to a 2016 ANACOM inquiry, for 84% of the inquired Portuguese consumers, the telecoms services included a loyalty period of 24 months and a loyalty period was not established in less than 4% of the contracts. Currently, more than 72% of the contracts for fixed services include a loyalty period which, in 99% of the cases, have a duration of 18 to 24 months – 24 months being the maximum limit for the loyalty period permitted by law. The low mobility driven by loyalty periods is further strengthened by the tendency of providers to establish renewed loyalty clauses to consumers, during or at the end of the initial loyalty period. This occurs in more than 48% of the contracts with loyalty periods, weakening the competitive dynamics in the sector. There is little justification to explain the need for further loyalty periods by the same operator other than seeking to lock in consumers that are more prone to switching, and that are no longer subject to penalties for early contract termination. In some cases, more than 60% of the clients subject to new loyalty clauses by one supplier did not experience changes in the services or equipment. In these cases, the renewed loyalty clauses may follow from other promotional conditions (e.g., offer of subscription channels). In these contexts, questions may be raised as to the degree of information of consumers regarding the contractual conditions associated with renewed loyalty clauses. The degree of consumer mobility in the telecom sector has already been analysed by the AdC, in a 2010 report that yielded a set of recommended measures to facilitate consumer switching. The majority of these recommendations where, in the meantime, implemented. While there is no information regarding the assessment, recommended by the AdC in the 2010 report, of the proportionality of the duration of the loyalty period, it is relevant to highlight that ANACOM identified challenges regarding the monitoring of this principle. Nonetheless, it remains relevant to deepen the understanding of the time that operators need to recover investment, which is, to a large extent, the rationale for the proportionality principle of the loyalty periods. The strategies adopted by the telecoms operators have weakened the effectiveness of the 2016 legislative changes, that aimed at widening the choices available to consumers in terms of duration of the loyalty period. While providers were obliged to offer contracts with loyalty periods of 6 and 12 2/36 months, as well as contracts with no loyalty period, they have increased the prices charged to consumers for the activation/installation of services, thereby raising the prices of those options relative to the 24 months loyalty contracts. As a result, only the 24 months offers, that limit consumer mobility, constitute a real option for consumers. As such, the magnitude of the benefits alleged by service providers seems to be illusive, reducing the likelihood that there is a justified relationship between the duration of the loyalty period and the magnitude of the benefits. The current model for determining the penalties for early contract termination/alteration in the event of a change of address creates the conditions for a conflict of interest, with adverse effects in the competition conditions. It is up to the telecoms operators, in a first instance, to determine whether the situation amounts to an abnormal change of the circumstances under which the contract was celebrated. If this is the case, then early termination charges are waived. Other facts deepen the negative effects of loyalty clauses, such as the complexity of the process for contract termination, the absence of transparent information and the risk of losing service provision during the switching process. These factors have particularly strong effects in consumers that are prone to inertia and, as a result, are more vulnerable to the exercise of market power. Given the context described above, the AdC puts forward eight recommendations to the legislator and the sectoral regulator – ANACOM – that aim at mitigating the competition concerns identified within loyalty policies in telecommunications contracts, thereby promoting consumer mobility and the competitive dynamics in the sector. To the legislator: Recommendation 1: Revoke no. 6 and amend no. 15 of article 48 of law no. 5/2004 so that the only exceptions to the general rule of banning new loyalty periods (in contracts that included an initial loyalty period) are: (i) changes entailing new subsidised equipment or (ii) installing new services. Recommendation 2: Amend the law so as to eliminate the exception by which operators do not need the consumer’s written consent to new contractual conditions celebrated through long distance means, if the first contact is initiated by the consumer, as stated in no. 3 article 48 of Law no. 5/2004. Recommendation 3: Establish in law no. 5/2004 when a change of residence constitutes “an extraordinary change of circumstances (…)” in which consumers based their decisions to celebrate a contract. Entrust ANACOM with the definition of the objective criteria for qualifying these situations, so as to include them in the law, and attribute monitoring powers on that regard to the sectoral regulator. Recommendation 4: Transpose the European Code to the national legal framework as early as possible, in particular the rules on (i) information requirements regarding the best available tariffs (article 105 (3)) and (ii) the creation of a mechanism to streamline switching and ensure continuity of service (article 106 (5)). Additionally, streamline the regulatory process that follows. Recommendation 5: Establish in the law that all methods available for service subscription must also be made available for contract termination, with similar conditions of ease and simplicity. To ANACOM: Recommendation 6: Assess, for each offer, the duration of the contract necessary for telecom operators to recoup the investments undertaken in the installation of services and subsidisation of equipment. Recommendation 7: Set rules to increase transparency of information on the exact value of early termination fees in all the informational material for offers with loyalty periods. The information should allow consumers to learn the exact value of early termination fees for each month of the loyalty period. Recommendation 8: Perform a cost-benefit analysis on the implementation of gaining-provider-led switching procedures, with one interface only. Within this scope, assess the possibility that consumers may opt for the contracts with the former supplier to be automatically terminated upon completion of the switching process. 3/36 1. Introduction Characterization of the sector 1. The electronic communications sector plays a key role in the economy, covering virtually all Portuguese families. According to data from the sector regulator - ANACOM, at the end of the 1st semester of 2019, the penetration rate was 170% in mobile services and between 79% (fixed broadband access to the internet) and 89% (fixed telephone service) in fixed services. 2. The level and evolution of prices for electronic communications in Portugal compare poorly to the European Union (EU). According to several indicators, Portugal displays prices that are significantly higher than the EU average (e.g., communications services’ prices 19.7% higher than in the EU)1 and this difference has been increasing, as can be seen from the information in Box 1. 1 Conversely,